Government Expands AIG Rescue, Stocks Slump

The Dow Jones fell below 7,000 for the first time since 1997 in Monday trading after AIG reported the biggest quarterly loss in U.S. corporate history at $61.7 billion. Europe’s biggest bank HSBC also announced that it planned to stop most of its U.S. consumer lending business.

According to preliminary calculations from the AP, the Dow dropped nearly 300 points to 6,763.06. It is the Dow’s lowest finish since April 25, 1997. The Standard and Poor’s 500 index is down 34 at 700, while the Nasdaq composite index is down 55 at 1,322.

The new AIG rescue funds mark the fourth time that the U.S. government has come to the aid of the giant insurer. Its first round of government help came in September of 2008, amid the first catapult of the Wall Street meltdown.

Instability at New York-based AIG poses a “systemic risk” to financial markets, the Treasury Department and Federal Reserve said in a joint statement. AIG is a titan on Wall Street and in international markets, providing insurance protection to thousands of entities. It also operates as a major source of retirement insurance, among other programs critical to the country’s banking and financial lifeblood.

“Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high,” the Federal Reserve said in a statement.

“Orderly restructuring is essential to AIG’s repayment of the support it has received from U.S. taxpayers and to preserving financial stability. The U.S. government is committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due,” the government said.

The new $30 billion will come from the government’s $700 billion financial rescue fund. AIG will be allowed to draw the money “as needed over time,” the government said.

The company received a $40 billion cash infusion from the bailout fund in November, when the government last revamped AIG’s rescue package, the Associated Press reported. The government has also spent $50 billion to help clear the company’s toxic assets, among other measures.

“It’s like triage. Band-Aids all over the place,” Bill Bergman, an analyst with Morningstar in Chicago, told the Washington Post. “I think it’s a lost cause already. Maybe we’re forestalling even bigger consequences by trying to keep it alive.”

The announcement came on the same day AIG reported that it had lost $61.7 billion in its fourth quarter, the biggest quarterly loss in U.S. corporate history.

In its earnings report, AIG said it lost $22.95 per share in the last three months of 2008. It lost $5.3 billion, or $2.08 per share, in the year-ago period.

News of new government moves to bolster AIG first emerged over the weekend, as officials worked to head off possible shockwaves to the financial system if credit agencies sharply downgraded AIG’s rating on news of the company’s deep fourth quarter losses.

In an interview on NBC’s “Today” show Monday, AIG chairman and chief executive Edward Liddy, said, “We’re going to be able to pay back the Federal Reserve. The new $30 billion is a standby line. It’s not necessarily something that we think we’ll have to draw on right away.”

Liddy, however, edged away from earlier statements about paying back taxpayers in full within two years.

“It is clearly our goal. But we need some help from the financial marketplace,” he said, according to news agencies. “The Federal Reserve debt we’ll pay back clearly in two years. And we’d like to make meaningful progress, paying back the original (government) investment.”

As part of the new infusion of funds, the Federal Reserve will take stakes in two international units. Instead of paying back $38 billion in cash with interest that it has used from a Fed credit line, AIG now will repay that amount with equity stakes in Asia-based American International Assurance Co. and American Life Insurance Co., according to the AP.

The government’s stake in American International Assurance may prove controversial, the New York Times reported. While the unit had been up for sale recently, it was unable to sell. That move may suggest that the federal government is willing to give AIG a better deal that private investors were willing to give.

“We have made meaningful progress in addressing liquidity issues related to AIG Financial Products and our securities lending activities and have announced several divestitures,” AIG’s Liddy in a statement. “However, the economy and capital markets remain in turmoil and we are taking additional steps to preserve the value of our businesses and maximize the ultimate proceeds for the benefit of all stakeholders, including taxpayers.”